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D. Determinants of supply.
1. A change in any of the supply determinants causes a change in
supply and a shift in the supply curve. An increase in supply
involves a rightward shift, and a decrease in supply involves a
leftward shift.
2. Six basic determinants of supply, other than price.
a. Resource pricesa rise in resource prices will
cause a decrease in supply or leftward shift in
supply curve; a decrease in resource prices will
cause an increase in supply or rightward shift in
the supply curve.
b. Technologya technological improvement means
more efficient production and lower costs, so an
increase in supply or rightward shift in the curve
results.
c. Taxes and subsidiesa business tax is treated as a
cost, so decreases supply; a subsidy lowers cost of
production, so increases supply.
d. Prices of related goodsif the price of substitute
production good rises, producers might shift
production toward the higher-priced good, causing a
decrease in supply of the original good.
e. Expectationsexpectations about the future price of
a product can cause producers to increase or
decrease current supply.
f. Number of sellersgenerally, the larger the number
of sellers the greater the supply.
E. Review the distinction between a change in quantity
supplied due to price changes and a change or shift
in supply due to change in determinants of supply.
d) Supply and Demand: Market Equilibrium
A. Have students find the point where quantity supplied equals the
quantity demanded, and note this equilibrium price and quantity.
Emphasize the correct terminology! (see class discussion
questions)
1. At prices above this equilibrium, note that there is an excess
quantity or surplus.
2. At prices below this equilibrium, note that there is an excess
quantity demanded or shortage.
C. Market clearing or market price is another name for equilibrium
price.
D. Graphically, note that the equilibrium price and quantity are
where the supply and demand curves intersect .This is an
IMPORTANT point for students to recognize and remember.
Note that it is NOT correct to say supply equals demand!
E. The rationing function of prices is the ability of competitive
forces of supply and demand to establish a price where buying
and selling decisions are coordinated.
2. Decrease in supply will have effect of increasing
equilibrium price and decreasing quantity (Figure 3-
6d).
C. Complex caseswhen both supply and demand shift
D. 1. If supply increases and demand decreases, price
declines, but the new equilibrium quantity depends on
relative sizes of shifts in demand and supply.
2. If supply decreases and demand increases, price
rises, but the new equilibrium quantity depends again
on relative sizes of shifts in demand and supply.
3. If supply and demand change in the same direction
(both increase or both decrease), the change in
equilibrium quantity will be in the direction of the shift
but the change in equilibrium price now depends on
the relative shifts in demand and supply.
D. A Reminder: Other things equal.
1. Demand is an inverse relationship between price and quantity demanded,
other things equal (unchanged).
2. Supply is a direct relationship showing the relationship between price and
quantity supplied, other things equal (unchanged).
3. It can appear that these rules have been violated over time, when
tracking the price and the quantity sold of a product such as salsa or coffee.
4. Many factors other than price determine the outcome.
5. If neither the buyers nor the sellers have changed, the equilibrium price
will remain the same.
6. The most important distinction to make is to determine if a change has
occurred because of something that has affected the buyers or something
that is influencing the sellers.
7. A change in any of the determinants of demand will shift the demand
curve and cause a change in quantity supplied. (See Figure 3-6 a & b.)
8. A change in any of the determinants of supply will shift the supply curve
and cause a change in the quantity demanded. (See Figure 3-6 c & d.)
9. Confusion results if other things (determinants) change and one does
not take this into account. For example, sometimes more is demanded at
higher prices because incomes rise, but if that fact is ignored, the law of
demand seems to be violated. If income changes, however, there is a shift
or increase in demand that could cause more to be purchased at a higher
price. In this example, other things did not remain constant.
f) Application: Government-Set Prices (Ceilings and Floors)
A. Government-set prices prevent the market from reaching the
equilibrium price and quantity.
B. Price ceilings.
1. The maximum legal price a seller may charge, typically placed
below equilibrium.
2. Shortages result as quantity demanded exceeds quantity supplied.
3. Examples: Rent controls and gasoline price controls (1970s)
C. Price floors.
1. The minimum legal price a seller may charge, typically placed
below equilibrium.
2. Surpluses result as quantity supplied exceeds quantity demanded.
3. Examples: Minimum wage, farm price supports